Public Policy Analysis Exam 1

Socio-economic system is defined as?

Interaction of economic activity and social processes shaping policy outcomes

What is utility in economics?

Satisfaction or benefit derived from consuming a good or service

Who is associated with the concept of the "Invisible Hand"?

Adam Smith

What does rivalry mean in the nature of goods?

One person’s consumption reduces the amount available for others

What does excludability mean in the nature of goods?

Ability to prevent non-payers from using the good

What is a private good?

Rivalrous and excludable (example: a sandwich, clothing, a car)

What is a public good?

Non-rivalrous and non-excludable (example: national defense, street lighting, clean air)

What is a toll (club) good?

Non-rivalrous but excludable (example: Netflix subscription, private parks, cable TV)

What is a common good?

Rivalrous but non-excludable (example: fisheries, grazing land, groundwater)

What is the Tragedy of the Commons?

Overuse of common resources because individuals act in self-interest (example: overfishing in oceans, overgrazing, traffic congestion)

What happens when a public good experiences congestion or crowding?

Utility diminishes as more people use it

What is the free rider problem?

Individuals benefit without paying, leading to under-provision of goods (example: public broadcasting, national defense, street lighting)

What is a positive externality?

Third parties benefit from a transaction (e.g., education, vaccination)

What is a negative externality?

Third parties bear costs from a transaction (e.g., pollution)

What is a Pigouvian tax?

Tax imposed to correct for negative externalities

First fill-in-the-blank answer

Moral Hazard

The concentration of market power in one seller is called

Monopoly

Uncertainty due to unequal access to information is called

Information Asymmetry

The costs associated with making an economic exchange are

Transaction Costs

When government intervention itself leads to inefficiency, it is called

Government Failure

What is the Invisible Hand?

Concept by Adam Smith that individuals pursuing their own self-interest in markets can unintentionally promote the overall good of society (example: a baker making bread for profit provides food for the community)

What is Regulatory Capture?

A situation where regulatory agencies are dominated or influenced by the industries they regulate, leading to decisions favoring industry interests over the public good (example: financial regulators protecting banks instead of consumers)

What is the Principal-Agent Problem?

When a principal (voters, shareholders) hires an agent (politicians, managers) to act on their behalf, but the agent acts in their own self-interest instead (example: politicians favoring special interest groups instead of voters)